Sunday, February 5, 2012

Taxing intellectual property

Owners of intellectual property (IP) are continuously stepping up their efforts to fight piracy by bringing litigation against individuals, organizations and companies for infringing on copyrights. New patent lawsuits are everyday stuff in the news. This behavior seems to be only picking up pace, which already puts a huge burden on the legal systems of countries where these court procedures are being held, and will doubtless be ever more costly over the coming years. Add to this the new measures proposed for inspecting and seizing products at country borders, and the cost really start stacking up.

It seems only fair that the owners of intellectual property, which are the ones requiring governments to enforce their monopolies, would bear their part of the financial burden of upholding the system they espouse. In short; if intellectual property is property in the same sense that physical property is, then there should be a requirement to pay a property tax on it!

Moreover, the economic downturn in recent years puts even more strain on public funding with politicians here in Finland raising taxes and even talking about raising the retirement age to cover the budget deficit in coming years. Why, then, are intellectual property holders given a free pass? Intellectual property - both copyright and patents - is supposed to benefit both society and the IP owners, but nowadays the benefits to the owners are enormous while the benefits to society are hard to see at all.

So my proposal is this: let’s introduce a property tax on IP, on copyrights and patents alike. The exact amount is up to parliament to decide on, but it should be a fixed percentage of the value of the IP (something like 1%, off the top of my head, would be reasonable), to be paid yearly to states for financing the enforcement of the whole IP system, thus forcing it to carry its own economic weight.

How to determine the value of IP, you ask? Simply have all entities wishing to deal commercially in IP register the worth of their property with the tax authorities. To make sure the stated value is the real value and not lowered in order to avoid paying the tax, also make a law requiring IP owners to license the distribution rights to their registered IP for the length of the taxation period, to anyone willing to pay the asked price.

The effect would be that any entity having actually valuable intellectual property would want to register a sufficiently high value, so as not to be forced to license it to competitors too cheaply. They would also not want to register too high a value, for which they would have to pay taxes. This would effectively determine the real market value of every piece of intellectual property.

Mandated licensing like mentioned above is not unprecedented. In fact, in Finland, this is exactly the way it works in mobile telecommunications, where the owners of the physical infrastructure are mandated to rent their capacity to competitors at market rates, still making a profit but enabling healthy competition in what would otherwise be a monopoly situation. This has led to Finland having one of the best cell phone coverages in the world while at the same time having among the lowest prices.

Introducing a tax system like this would not only bring in a lot of money to the state budget, but would have a slew of positive side effects as well.

1. Allowing real competition in the marketplace

Consider the music industry. If you want to buy, say, Madonnas latest album, you have only one seller - Madonna’s music label. They have no competition, since there is only one Madonna, and can dictate any price they want. If anyone would be allowed to license the Madonna IP, there could finally be real competition in the marketplace and prices for consumers would likely free fall.

2. Making corporate tax avoidance harder

Many companies use shuffling money between their entities in different countries as a tool to avoid paying corporate taxes. The IP tax would be impossible to circumvent, since it would have to be payed in the country where sales are happening, thus guaranteeing at least some income to the state.

3. IP “squatting” would be much less profitable, perhaps impossible

Today, especially concerning patents, there are lots of “hoarders” that collect huge portfolios of patents that they never use in a product, but are only ever used as a litigation tool to stifle innovation and hinder competition. With the proposed tax scheme, this would become impossible, since either large portfolios of highly valuable patents would cost too much in taxes for patent collecting to be justitifed, or the value of the patents would be so low that any competitor could just license the patents outright and there would be no basis for a lawsuit. Patents trolls (i.e. companies whose only business model is suing others over patents) would go extinct.

Using copyrights to keep works away from the public in order to prevent them from competing with their owner's hit-of-the-month would become much harder for the same reasons.

4. The problem with orphaned works would go away

Today, orphaned works (i.e. copyrighted works whose creators are unknown or unreachable) are a huge problem. In the proposed system, any works that are not in the public domain, but are not registered to any known owner would simply have a stated value of 0 € and anyone could license them for free. If the owner ever shows up, all he or she has to do is register the “real” value and start raking in licensing fees. Provided anyone would want to pay, that is.

5. Infringement cases would have a much better basis for their damages

Today, the damages awarded in copyright infringement cases are straight out of this world. With the “real” value of the IP in question known, court cases would be much saner and based on reality instead of on some CEO’s wet dream.

6. Copyright and patent term lengths would not matter very much

Since the value of IP licenses would be what the market can actually bear, copyright term lengths would not matter anymore. If something is not worth paying the tax for, its stated value will approach zero and it will effectively become public domain anyway.

7. Piracy would diminish as a problem

In wake of the market opening up, many services would emerge which would make piracy a thing of the past by providing superior value at an affordable price.

In conclusion, this plan would enable a healthy, functioning market economy in intellectual property, while bringing in extra revenue to states and ending unnecessary and costly litigation. Many of the finer details are still not worked out, and should be settled by lawmakers. I am sure the IP owners would scream bloody murder over such a proposition, but why should we care? Our civil liberties are being eroded at an ever increasing rate in the name of IP, and if there is a way to preserve both, then I for one think it is definitely worth a try.

My piracy statement is based on the often claimed fact that piracy is giving the user superior value over buying legitimate goods. Due to DRM, for instance, it is hard and in some cases impossible to listen to music you bought on any device of your choice. This is almost never true for pirated goods.

Thus, by enabling anyone to compete with the traditional media companies, I expect many services to arise which provide customers with the same benefits as piracy, but without the hassle (fiddling with torrent files, avoiding malware, getting files of bad quality etc.). I for one would be prepared to pay for such a service, but there is none to be had. I also expect the prices to fall to such levels that the difference between free and non-free is irrelevant. This could b acheived using some subscription schemes, for example.

By the way, Nicklas, I'm working on a new system for funding Free/Libre/Open works. I like your thought process on things, and I wonder if you'd be interested in participating in our conceptual development. We are really doing something that is a shift from all the existing models, although it is based on many prior ideas. We are being very ambitious to get the system just right.

Anyway, it's not public really yet, but we have a system in progress. Please contact me to get an invitation to check it out.